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How About a “War on Taxes”?

David Cay Johnston, who does an incredible job covering U.S. tax policy and other business issues for the N.Y. Times, today has an interesting article about how the I.R.S. is outsourcing the collection of back taxes to third parties — i.e., collection agencies. “The private debt collection program,” Johnston writes, “is expected to bring in $1.4 billion over 10 years, with the collection agencies keeping about $330 million of that, or 22 to 24 cents on the dollar.”

Maybe that seems like too big a cut to surrender. And maybe people will be worried about the collection agencies having access to their financial records (a concern that Johnston addresses in the Times article). But what’s most striking to me is that the I.R.S. knows who owes the money, and knows where to get it, but can’t afford to collect it itself because it is understaffed. So it has to hire someone else to do it, at a stiff price.

The I.R.S. admits that external collection is far more expensive than internal collection. Johnston cites current I.R.S. commissioner Mark Everson as saying so, as well as former commissioner Charles O. Rossotti, who told Congress that if the I.R.S. hired more agents, it “could collect more than $9 billion each year and spend only $296 million — or about three cents on the dollar — to do so,” according to Johnston.

Even if Rossotti was exaggerating by a factor of 5, the U.S. Govt. would still be getting a better deal by hiring more agents than by contracting to a third party that takes a 22% cut. But Congress, which oversees the I.R.S. budget, is famously reluctant to give the agency more resources to do its job. We touched on this subject in a column we wrote a few months back.

Why is this the case? Maybe our congressmen are a bunch of history buffs so imbued with the spirit of our republic that they remember the Boston Tea Party too well and are scared of how the populace might revolt if they ramp up tax enforcement. But keep in mind that we are talking about tax enforcement here, which is the I.R.S.’s job, and not tax law, which is Congress’s responsibility. In other words, Congress is happy to set the tax rates that it does; but it doesn’t want to be seen as giving too much comfort to the bad cops who have to go out and collect those tax dollars.

So maybe they need to relabel their effort to get all the tax money that is owed. Since Congress approves so much money for the War on Terror and the War on Drugs, maybe it’s time for them to launch a War on Taxes — well, really, a War on Tax Cheats. What if they could demonize the tax cheats so thoroughly, emphasizing that the “tax gap” (the difference between taxes owed and money collected) is about the size of the federal deficit: would that make it more politically palatable to give the I.R.S. the resources to collect the money that is owed? Maybe they could put pictures of tax cheats on milk cartons, on flyers at the post office, even on America’s Most Wanted. Would that do the trick? Would a properly managed War on Tax Cheats fix the problem?

For now, we’ll have to settle for the I.R.S. turning over the job to collection agencies who will collect some money but not nearly as much as is owed. Which means a lot of money — a lot of tax money, that is, collected from the people who don’t cheat — continuing to go down the drain.

[Update: Paul Krugman’s Monday Times column also addresses the I.R.S. plan; here’s the link, though it may only work if you subscribe.]

Mack

August 20, 2006 @ 11:39pm

If the debts are collectible at a rate of 3 cents on the dollar by the IRS itself, but we have another party doing the work at 23 cents on the dollar, there's certainly room for the market to act.

Given competitive bids for the collection work, why would not the cost be driven closer to what the IRS can do on its own?

If that doesn't happen then shouldn't we believe that the process is not competitive, and look for evidence of cronyism or worse?

Jeffery Faulk

August 21, 2006 @ 12:46am

I'll say. The only reason for a no-bid contract like they would be getting is that money has changed hands. Considering the people in power right now, I would bet the farm on it. Corruption is their middle name.

ASokoloski

August 21, 2006 @ 3:31am

Mack, the IRS is not a profit-driven institution. It has very little incentive to cut costs. In fact, the best way for a government department to get more money is to waste enough that you can claim you're under-funded. The current situation in the IRS may be exactly that.

"Cronyism or worse" is a good way to put it. I have no doubt that if people in the IRS were trying, they could find a private collection agency at least as cost-effective as themselves.

This behavior is pretty much an unavoidable consequence of being funded through coercive taxation rather than voluntary profits. It's "government failure", if you will, and it's a hundred times more common than market failure.

If you can't tell, I favor anarcho-capitalism ;) Short version: anything that people really want, they will be willing to pay for, and therefore does not need to be funded by taxation, or by a geographic monopoly.

Read more...

zbicyclist

August 21, 2006 @ 4:31am

A "War on Tax Cheats" would be a "War on Those Loyal Americans Who Contributed to my Campaign".

malcontent

August 21, 2006 @ 8:23am

How about a tax on war? Maybe that would be cool.

Jeremy Cherfas

August 21, 2006 @ 8:34am

Here in Italy, the government has just announced an eight-year plan to collect some taxes. It'll never work.

George S

August 21, 2006 @ 9:50am

One reason Congress might prefer to outsource this work rather than hire more agents is because hiring more people is a longterm increased cost. If the collection agency is able to collect most or all of the back taxes, then you can stop using them (at least until you might need them again). If you hire more staff, you're stuck with them after they collect all the back taxes (very unlikely). Most likely they would never collect all the back taxes, thereby insuring their continued employment.
Increasing the size of government seldom solves any problem.

jroane

August 21, 2006 @ 2:59pm

To George S. By your reasoning, if the back taxes are never fully collected, then the agency would also need to be used for the long term, and as such would also be a long term cost. As long as there uncollected taxes, someone will have to try to collect, either IRS staff or private agencies. While the cost advantage would decrease with the number of IRS agents, it wouldn't take much study to see where the hiring vs. outsourcing decision would change. The only true long term solution is to change the process to effectively levy and collect taxes at the transactional level and to eliminate the credits/deductions/exemptions that make a mockery of the system. Of course, that will never happen.

TDaulnay

August 21, 2006 @ 4:52pm

So, we're careening down the road of corruption that Rome followed. Tax farming is a terrible idea, and will make for some whopping scandals. I wonder how much more America can become like the late Republic? It already has mercenaries (the 15,000 'private military contractors' hired in Iraq), an elite that doesn't serve in the military, and bitter factionalism.

tlianza

August 21, 2006 @ 7:12pm

This article strikes me as very strange. There is no mention that I saw of a contrary perspective. There must be some justification (even if it's one we all disagree with) for going forward with the privatization plan. The article lacked coverage of any sort on the other side. What is the other side?

I am not so cynical as to believe that congressmen are knowingly making decisions they believe to be poor.

LBCrystal

August 22, 2006 @ 5:32am

Certainly, I'd like to see what's behind the decision (in reality), and it does seem nonsense.

Aside from that, my reaction is that there is a big difference between people who owe taxes and haven't paid and 'tax cheats.' The people who owe money may not necessarily have cheated.
Sometimes, a taxpayer's situation changes and they are not aware of the impact on their tax situation. Conversely, those who cheat may well pay all that the IRS is aware that they 'owe.'

The decision is part of the political game and an informed public should hold those responsible for it accountable for the FWA (fraud, waste, and abuse).

meomaxy

August 22, 2006 @ 7:51pm

Why not let collection agencies bid for the uncollected back taxes? The IRS would post some pertinent information about the taxes to be collected, and then collection agencies would bid how much of a cut they would accept to collect on that debt. The lowest bidder is then given the account to go after. Some collection agencies might specialize in going after lots of easy cases for a small cut. Others might specialize in a particular metropolitan area.

mathking

August 24, 2006 @ 11:33pm

The problem with the privatization argument is that there really are some things the government does much better than the private sector. For example, there are no insurance companies which even get close to the efficiency of medicare. This is largely because medicare doesn't need the large profit margins and on the average the front line employees are able to more quickly and effectively process claims than those of insurance companies.

Every bit of professional analysis, including that by the authors of this blog, shows that the IRS could collect a lot more taxes for a lot less money than we will spend on private collectors. If you read the comments of members of congress in support of this plan, they basically argue that since we will be collecting taxes we have not previously collected, the American people will be better off. This is true if the only options are do nothing or hire the debt collectors.

The current congress and administration has a philosophical belief that private companies are always "better" than government agencies. Even though this sometimes flies in the face of evidence.

Read more...

Mack

August 20, 2006 @ 11:39pm

If the debts are collectible at a rate of 3 cents on the dollar by the IRS itself, but we have another party doing the work at 23 cents on the dollar, there's certainly room for the market to act.

Given competitive bids for the collection work, why would not the cost be driven closer to what the IRS can do on its own?

If that doesn't happen then shouldn't we believe that the process is not competitive, and look for evidence of cronyism or worse?

Jeffery Faulk

August 21, 2006 @ 12:46am

I'll say. The only reason for a no-bid contract like they would be getting is that money has changed hands. Considering the people in power right now, I would bet the farm on it. Corruption is their middle name.

ASokoloski

August 21, 2006 @ 3:31am

Mack, the IRS is not a profit-driven institution. It has very little incentive to cut costs. In fact, the best way for a government department to get more money is to waste enough that you can claim you're under-funded. The current situation in the IRS may be exactly that.

"Cronyism or worse" is a good way to put it. I have no doubt that if people in the IRS were trying, they could find a private collection agency at least as cost-effective as themselves.

This behavior is pretty much an unavoidable consequence of being funded through coercive taxation rather than voluntary profits. It's "government failure", if you will, and it's a hundred times more common than market failure.

If you can't tell, I favor anarcho-capitalism ;) Short version: anything that people really want, they will be willing to pay for, and therefore does not need to be funded by taxation, or by a geographic monopoly.

Read more...

zbicyclist

August 21, 2006 @ 4:31am

A "War on Tax Cheats" would be a "War on Those Loyal Americans Who Contributed to my Campaign".

malcontent

August 21, 2006 @ 8:23am

How about a tax on war? Maybe that would be cool.

Jeremy Cherfas

August 21, 2006 @ 8:34am

Here in Italy, the government has just announced an eight-year plan to collect some taxes. It'll never work.

George S

August 21, 2006 @ 9:50am

One reason Congress might prefer to outsource this work rather than hire more agents is because hiring more people is a longterm increased cost. If the collection agency is able to collect most or all of the back taxes, then you can stop using them (at least until you might need them again). If you hire more staff, you're stuck with them after they collect all the back taxes (very unlikely). Most likely they would never collect all the back taxes, thereby insuring their continued employment.
Increasing the size of government seldom solves any problem.